Trouble Among BRICs: Brazil v PRC Imports, Pt 2

Here's another angle on the incipient troubles of one major emerging economy dealing with imports from another in the traditional domain of more labour-intensive manufacturing. A few weeks ago, I dubbed the importation of cheap Chinese garments in Brazil--land of the famously skimpy swimwear--the "bikini wars" in honour of China's previous entanglement with the EU known as the "bra wars."

As it turns out, the story is a bit more complex. In an odd rerun of the so-called "Wal-Mart effect" wherein Chinese imports by the leviathan US retailer are attributed to keeping inflation in check Stateside over the past few decades, we have similar dynamics in Brazil at present. As commodity prices spiral upwards, affecting food, energy, and so forth, Brazilian authorities have been of two minds about Chinese imports. On one hand, Brazilian retailers and certain other firms keep on lowering manufacturing input costs are welcoming the influx of Chinese goods to keep costs down. For instance, Casas Bahia is an important retailer of furnishings and housewares in Brazil that has pioneered selling on an instalment basis to less well-off segments who would otherwise be unable to purchase these goods given that consumer credit is scarcely available to them. However, it is raising more than one eyebrow in that, alike Wal-Mart, most of its goods come from China.

On the other hand, Brazilian finished goods manufacturers are crying foul over the usual things--cheap Chinese labour, an undervalued currency, etc:

Cheap imports from Asia help to reduce the price of household goods but they are also accused of undermining domestic manufacturers. The government is being forced to choose between local industry and protecting the poor from inflation. “Imports have a deflationary impact; they act as a brake on rising prices,” said Hugo Bethlem, vice-president of Pão de Açúcar, Brazil’s biggest retailer.

Fuelled by rapid credit growth in the lead-up to last year’s presidential election, Brazil’s economy expanded 7.5 per cent in 2010. The government is forecasting that it will grow about 4.5 per cent this year, but the slowdown has not been enough to reduce the overheating in the economy.

Economists expect inflation to breach the central bank’s target level this month and to peak in August at about 7 per cent. Meanwhile, the central bank has responded by raising interest rates – it was expected to increase the benchmark Selic rate of 11.75 per cent late on Wednesday by another 25-50 basis points.

But Brazil’s interest rates are already the highest of any large economy. Further increases are only attracting more hot money inflows from abroad, worsening what Brazil calls the “currency war”, the steady appreciation of its currency, the real, against the US dollar. In recent weeks, the real has appreciated from a level of about R$1.65 against the dollar to between R$1.55 and R$1.60.

To augment the interest rates increases, the government is implementing capital controls that seek to dampen consumer credit growth – one of the sources of overheating in the economy. It is also introducing taxes that aim to discourage companies from borrowing dollars abroad at low interest rates and then repatriating the proceeds to Brazil, a trend that is strengthening the real.

It's now little wonder why Brazil has been most critical of the BRICs on IMF efforts to prescribe guidelines on capital controls...when their own folks are inundating them with speculative inflows! The speculative element of (presumably unhedged) foreign borrowing is interesting. The Asian financial crisis famously exposed Southeast Asian borrowers who thought going abroad to borrow in yen and other low-interest rate currencies was a smart thing--until their currencies faced massive devaluation, that is. Now we have nearly the opposite situation: the real is more likely than not to appreciate given the tightening bias at home while the US remains a money-for-nothing enthusiast. Certainly, few are betting that the US will do better than Brazil in the near future. End result? Not only is it possible to save on interest expense, but also gain on anticipated BRY (Brazilian real) appreciation.

It looks like a one-way bet a the moment, increasing the local currency's strength in the process, as more and more take it. There's no easy way out for Brazilian officials, and I am not quite sure if Beijing will be sympathetic to Brazilian financial authorities despite both pretty much agreeing on the harmfulness of American free-money policies.

How to manage China? Well, slapping tariffs is being tried:

In the meantime, [Brazil] is trying to protect domestic manufacturers from the stronger real, which is leading to a flood of cheap imports, by raising tariffs, particularly on Chinese goods. Only a few days before [Brazilian President Dilma] Rousseff left on a five-day trip to China this month, Brazil slapped an anti-dumping tariff of $4.1 per kilogramme on Chinese-made synthetic fibres, in response to growing pressure from domestic industry lobby groups.

Make no mistake: in global currency war, it's not just rich versus poor countries, but poor versus poor countries as well (inter alia). It's not just a matter of LDCs appreciating their currencies vis-a-vis those of industrialized nations as some commentators believe it is--see and hear Martin Wolf at the LSE on this point--but of LDCs moving in lockstep to avoid South-South entanglements of this nature in the process. A Hobbesian currency war of all against all, then? That's how it stacks up for now as America has completely lost its bearings and its ability to stabilize the system.